In the challenging world of a global pandemic, government shelter-in-place orders, travel bans and social distancing are measures that force a change in consumer spending habits. As expected in these situations, spend in the travel, dining and entertainment industries has seen a rapid decline, along with all other types of discretionary spend. Across all industries spending behaviors have changed, and it is unclear how long these behaviors will become a new normal. Conversely, spend on groceries and streamed entertainment services have seen a noticeable increase. For the millions of consumers that have lost their main sources of income as a direct result of the pandemic, the inevitable changes in spend behavior are accompanied by understandably high levels of anxiety and insecurity.
The banking industry has already seen a significant hit in earnings due to potential credit losses brought about by the pandemic, however their actions imply that they are cognizant of the fact that their very own financial fortunes are directly linked to their customers’ ability to recover from this crisis. This has caused a shift from the aspirational benefits of credit cards (motivated through tiering and long-term goals) to necessity benefits, in other words, rewards members can achieve and use in the immediate and near-term.
At Kognitiv, we set out to explore how credit card loyalty programs, and more broadly, financial institutions are responding to this societal shift.
Credit Card Reward Programs
There are a number of examples in the market of credit card reward programs aligning their offering with their customers’ changing spend behavior making it easier to earn and burn on services and products available during the pandemic. Here are some notable ones:
TD Bank in Canada are offering double points on online grocery purchases from over 20 brands. They are also offering 25% less points to redeem for gift cards, merchandise and ‘Shop The Mall’ retailers available through TDRewards.com.
Chase Sapphire and co-branded cardholders now qualify to earn either 3X or 5X points or miles per dollar spent on grocery purchases on up to a maximum of $1,500 in eligible purchases from May 1 through June 30, 2020.
Hilton American Express Surpass and Aspire cardholders qualify for 12X points per dollar on grocery purchases up to July 31, 2020.
Delta SkyMiles Reserve, Platinum, Gold and Blue Consumer cardholders qualify for 4X miles at qualified US supermarkets from May 1 through July 31, 2020.
Marriott Bonvoy Brilliant cardholders can earn 6X Marriott Bonvoy points (same rate of points advertised for a hotel stay) on up to $7,500 in eligible supermarket purchases between May 1 and July 31.
HSBC Middle East, through Air Miles, have launched a redemption partnership with Zomato allowing members to use their miles from the comfort of their own home during lockdown.
Marriott Bonvoy Brilliant cardholders can earn up to $300 in statement credits on eligible restaurant purchases (takeout and delivery included) from June 1 until August 31, 2020.
Hilton Aspire cardholders can earn a $250 Hilton resort credit with eligible restaurant purchases (takeout and delivery included) from June 1 to August 31.
American Express’ partnership with Uber has been around for over five years now. With social distancing measures forcing consumers to avoid Uber rides, they have shifted their reward points offer from Uber rides to UberEats. Any Uber credits earned can now be applied to UberEats.
Not to be outdone, Chase has partnered with DoorDash. They are offering Chase Sapphire Preferred cardholders complimentary DoorDash subscriptions (normally $9.99 per month) which entitles them to free deliveries with a minimum $12 purchase. Chase customers can also receive $60 statement credits on DoorDash services in 2021.
Online Collaboration Tools
Brex, a Corporate credit card company focused on providing credit for start-ups, have shifted their bonus points strategy from dining, travel and rideshare to remote collaboration tools with a 7X points offer.
These include expenses for the video-conferencing platform Zoom, the instant-messaging platform Slack, the video-conferencing platform GoToMeeting, market intelligence app Gong and remote work collaboration app Monday.com.
On top of bonus points, Brex account holders can also apply for up to 25% discount off new annual subscriptions to Zoom, Slack and Monday.com purchases during the COVID-19 crisis.
American Express Blue Cash Preferred cardholders can earn 6X points on the following streaming services:
Live TV Streaming Services: YouTube TV, Sling TV, Hulu, AT&T Now
Video Streaming Services: Netflix, Prime Video, Disney+, Apple TV+
Music Streaming: Spotify, SiriusXM, YouTube Music, Pandora, Apple Music
Sports Streaming: ESPN+, MLB.TV, NHL.TV, NBA League Pass
Likewise, US Bank Cash + Visa Signature cardholders get 5% cashback for a range of popular streaming services.
HSBC and Air Miles Middle East have launched a redemption partnership with noon.com so members can order products online from the marketplace for home delivery.
Many credit card reward programs already provide their cardholders the option to donate their points to charitable causes as a standard reward option. In the wake of the COVID-19 crisis, American Express, through its partnership with JustGiving, are taking an extra step. They announced that they are going to match each dollar donated (up to $1 Million in total) when cardholders use their points to donate to Feeding America via JustGiving.
With the ominously high unemployment rate and its obvious implications to banks’ financial outlook, it’s very easy to imagine bank executives taking the traditional route of cost-cutting and tightening lending restrictions to minimize the erosion of shareholder value. Since the global financial crisis, financial institutions have had to painstakingly rebuild trust amongst consumers. The current crisis gives them the opportunity to demonstrate that they have truly espoused stakeholder capitalism and corporate responsibility as key principles within their companies.
There are many examples that show this to be the case. After all, institutions that embrace longer-term thinking would be quick to realize that:
- Their company’s eventual recovery from this crisis is intrinsically linked to their customers’ ability to pull through this crisis;
- They are uniquely placed to directly influence their customers’ ability to pull through; and,
- The way they treat their customers now will play a more influential role in determining their long-term loyalty than any rewards program.
Here are a few notable examples:
DBS Bank (Singapore) are allowing multiple credit card holders the ability to consolidate all their accounts into a single loan with significantly lower interest rates.
The Commonwealth Bank of Australia have dropped interest rates on their home loan products and are offering up to 6 months deferment of monthly repayments. On top of that, they are also offering customized support packages for customers that have lost their jobs or have been stood down. Another thing to note is that they are providing customers over 70 years of age access to priority queues at their customer call centers.
National Australia Bank (NAB) are offering their credit card holders a reduction in interest rates, a freeze in late payment fees and a reduction to the minimum repayment rate to the greater of 0.5% or $5. They have also extended their assistance to small business owners with a deferral of monthly loan repayments (principal and interest) for up to 6 months. Merchants with acquiring facilities from NAB, can opt to pay fees on a per transaction basis instead of the monthly fixed fees on their contract. NAB are also waiving terminal rental fees for 3 months.
The Big 5 Canadian banks have announced up to 3 months deferral on credit card payments (up to 6 months in BMO’s case) and either a reduction in the effective interest rate to 10.99% (Scotiabank, BMO and CIBC) or a rate reduction of 50% (TD Bank and RBC) for those that qualify for payment deferral. CIBC are offering tailored assistance packages for their customers where the level of support will vary according to each customer’s situation.
Spanish banks have promised domestic SMEs and the self-employed tens of billions of euros of unsecured working capital loans. Adding to the €100 billion Spanish government package for small business, the banks’ contribution brings the total liquidity assistance to Spanish enterprises to about €2 billion.
At the end of the day, every recently unemployed individual or struggling business will be in his/her/its unique situation – different levels of debt, levels of liquidity, asset-base and prospects for a quick recovery. As a consequence, logic dictates that banks that set themselves up with the ability to provide tailored assistance packages will likely be the most effective at shoring up their existing customers through the crisis.
The Elephant in the Room
For credit card issuers, as much as these actions – i.e. deferral of monthly repayments, reduced interest and waiving of late payment fees – are designed to provide a much-needed lifeline to consumers and small businesses, they will eventually need to face the proverbial “elephant in the room” – the inevitable rise in debt delinquencies. Current regulation in the US requires issuers to charge off credit card debt aged 180 days – i.e. write it off as an asset and incur a loss. There are similar such regulations in other markets, all with the same consequence.
Looking back at the Great Recession, the credit card charge-off rate for all commercial banks rose from 3.85% in the second quarter of 2007, to 10.97% in the second quarter of 2010. Given that the outstanding revolving debt peaked at $1.021 trillion in April 2018, a 10.97% charge-off translated to billions in lost revenue for issuers.
This pandemic has already incurred more job losses than the Great Recession officially making this unchartered territory for credit card issuers.
The two possible ways to address the coming credit risk are:
- for the relevant Regulatory Agencies to extend the 180-day charge-off rule; and/or,
- for issuers to consider offering their customers to rewrite their revolving credit card debt into installment loans.
No matter what the outcome, the inevitable action that banks will need to take is to tighten their lending standards. The Wall Street Journal has reported that top US lenders are already reviewing their lending strategy.
In This Together
The slightly overused cliché of “we’re all in this together” could not be truer than in the current situation. At no other time in modern history have the fortunes of governments, businesses and consumers been inextricably linked, where one’s success cannot exist without that of the other.
A concerted effort is required, and financial institutions play a pivotal role. Anecdotally, the actions that banks have taken thus far have been positive, but only time will tell if more is required to generate the desired outcome for the long-term.
1Board of Governors of the Federal Reserve System (U.S.), Charge-Off Rate on Credit Card Loans, All Commercial Banks [CORCCACBN], retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/CORCCACBN
2According to the Board of Governors of the Federal Reserve System, credit card loans comprise most of revolving credit, but other types of loans are also included